* Oil jumps up to 4% as Gulf tensions disrupt Strait of

Hormuz traffic

* Fed rate hike expectations rise as US inflation data

seen above target

* Dollar strengthens, euro slips as ECB signals vigilance

on energy-driven inflation

(Updates throughout)

By Wayne Cole and Amanda Cooper

SYDNEY/LONDON, May 28 (Reuters) - Stocks retreated from

record highs on Thursday after a fresh U.S. military strike on

Iran and Kuwaiti reports of missile attacks dented investor

confidence in a peace deal that many see as key to easing global

inflation risks.

Oil rose as much as 4% and bond prices tumbled as the

escalation muddied signals on peace talks, after U.S. President

Donald Trump dismissed an Iranian report of a deal to resume

traffic through the Strait of Hormuz.

"Over the next two weeks, we expect either a deal for a new

ceasefire, or the current ceasefire will have collapsed with

active hostilities resuming," said Madison Cartwright, a senior

geo-economics analyst at CBA.

He put a 70% probability on a deal,but said the fate of the

strait remained uncertain.

"Insurance through the strait has become prohibitively

expensive and it's unclear how and at what price insurance will

be made available," he added. "It is also not clear if Iran will

charge a toll, or a toll by another name."

The U.S. military said it had carried out new strikes targeting

an Iranian drone operation, while Tehran said it had attacked a

U.S. airbase in Kuwait.

With transits through the strait still at a trickle, Brent crude

was up 2.5% at $96.6 a barrel. The price has fallen back from

four-year highs above $126 in late April, but remains 33% above

pre-war levels and 50% higher than a year ago.

Yields on 10-year Treasury notes were up 1.7 basis

points at 4.5%, as sustained high oil prices kept upward

pressure on inflation expectations. Euro zone yields

also rose, with Germany's 10-year Bund up 1.5 bps at 3%.

The developments also cooled this week's tech-led rally in

stock markets that had pushed global indexes to new record

highs. Europe's STOXX 600 was down 0.6% in morning

trading, just below February's all-time peak, while U.S. stock

futures were down 0.1% to 0.2%.

INFLATION DATA TO TEST FED

Attention now turns to U.S. personal consumption

expenditures (PCE) data, which includes the Federal Reserve's

preferred inflation measure.

Higher fuel costs are expected to lift the headline PCE to

a three-year high of 3.8%, while core inflation is seen rising

0.3% to an annual 3.3%, well above the Fed's 2% target.

The pick-up has prompted more Fed policymakers to call for

dropping its easing bias, or even preparing for a rate hike.

The shift in Fed expectations has supported the dollar, which

held at 99.506 against a basket of currencies, steady on

the week.

"I know there's an awful lot of dollar bears out there, and

they have been for a while. But there's always a contrarian

story here. And it could just be that the dollar has a bit of a

resurgence now," Trade Nation market strategist David Morrison

said.

The dollar hovered near a four-week high against the yen at

159.5, just below the 160 level that has previously

triggered Japanese intervention.

The euro eased 0.1% to $1.161 and is on track for a 1.1%

monthly fall, though expectations of a June European Central

Bank rate hike offer some support.

ECB Chief Economist Philip Lanesaid on Thursday policymakers

must prevent the jump in energy costs feeding into broader

inflation expectations.

In commodities, gold slid 1.5% to $4,390 an ounce,

pressured by a stronger dollar and higher bond yields, which

reduce its appeal as a safe haven.

(Additional reporting by Wayne Cole. Editing by Thomas

Derpinghaus and Mark Potter)